Earlier this week I made my first submission to the Universities Accord review. One issue the submission covers is whether Job-ready Graduates policies can meet demand from the so-called Costello baby boom birth cohort. This post looks at how large variations in Commonwealth contribution rates and misaligned systems of indexation could affect overall growth in student places. A subsequent post looks at the geographic distribution of places.

The relative value of Commonwealth contributions

Job-ready Graduates combines a fixed maximum basic grant amount (MBGA) for higher education courses (all CSP coursework except medical places and places for regional Indigenous bachelor degree students) with Commonwealth contributions that vary between disciplines. The maximum funding a university can receive for higher education courses is the lesser of their full-time equivalent places delivered multiplied by the relevant Commonwealth contributions or the MBGA amount in its funding agreement.

This system creates trade-offs between opportunities for students, which are maximised by focusing on the courses with the lowest Commonwealth contributions, and meeting skills needs, with skills shortage occupations typically requiring graduates from courses with higher Commonwealth contributions.

Trade-offs were already a feature of the pre-JRG funding system, but JRG exacerbated them as the chart below shows. One new place in a funding cluster 4 course (medicine, dentistry, agriculture) costs 24.6 places in funding cluster 1 course (business, law, most humanities and social sciences). Under the pre-JRG system the highest funding cluster was 10.9 times the lowest funding cluster; still high, but a less extreme trade-off than under JRG.

We don’t yet have 2021 enrolment data to see where enrolments are moving by discipline. A move towards the higher Commonwealth contribution fields will consume more of the available funding, leaving less money to finance additional student places.

I don’t believe this is an immediate major issue. System capacity may be down on 2020 JRG projections but so is domestic demand, due to a strong labour market and flat or falling numbers of school leavers with an ATAR in the big states. But increased school leaver numbers due to a larger birth cohort will push demand up again in the mid-2020s.

Misaligned indexation systems

While the previous government claimed that the MBGA for higher education courses was indexed, there is no automatic or legislatively required indexation of the MBGA. Instead, the previous government included an allowance based on estimated future CPI rates in MBGAs set in university funding agreements for 2021 to 2023. These agreements were made in 2020, using estimates of CPI for subsequent years.

For 2022 and 2023 the CPI estimates were wrong for each year but add up to about the right level over a two-year period, as seen in the table below. Recent inflation and estimates of inflation for 2024 and 2025 indexation, however, significantly exceed the CPI rates originally predicted and budgeted.

Maximum basic grant amount and Commonwealth contribution indexation, actual and estimated

	2022	2023	2024	2025
Funding agreement indexation to 2023/previous indications for 2024 and 2025	2.30%	2.30%	2.10%	2.30%
Commonwealth contribution indexation – actual 2022 and 2023, 2024 and 2025 based on RBA CPI forecast	0.90%	3.50%	8.00%	4.70%

Sources: Spreadsheet sent to universities with their Job-ready Graduates funding; DoE, Funding clusters and indexed rates web page; RBA, Forecast table – November 2022.

Commonwealth contribution rates, by contrast, are automatically indexed each year under section 198-5 of the Higher Education Support Act 2003. For 2024 and 2025 they will go up by much more than originally estimated (the lagged nature of indexation means that 2024 indexation will reflect inflation in 2022, and 2025 indexation reflect inflation in 2023; the Accord panel should recommend more contemporary indexation).

Unless future funding agreements reflect revised inflation numbers, grants will be indexed by the top line of the table above and Commonwealth contributions by the bottom line, reducing the real value of the MBGA and how many student places it can fund.

The consequences for student places of misaligned indexation

Without detailed enrolment data the system-level consequences of misaligned indexation cannot be calculated. But the chart below shows its effects or estimated effects for funding clusters 1, 2 and 3. It takes $1 million in CGS funding and calculates how many student places it can deliver for each funding cluster. It indexes the original $1 million according to the top line of the table above, the CPI levels estimated during the Job-ready Graduates transition. It reaches $1.119 million by 2025. The Commonwealth contribution rates are indexed according to the actual or estimated CPI, the second line in the table above. The loss of student places between 2021 and 2025 varies significantly in absolute terms according to funding cluster; in percentage terms it is 9 to 10 per cent.

Conclusion

Funding agreements for 2024 must be settled in 2023 so there is time to fix this problem (funding agreements are usually three years, but as the Accord could lead to major policy changes a one-year interim agreement is possible). But recent inflation has highlighted another structural flaw in Job-ready Graduates. If the Accord panel recommends keeping a block grant system it needs to align indexation of Commonwealth contributions and maximum basic grant amounts.

Less urgently, the gaps between Commonwealth contribution amounts need to be reduced, so that universities are not forced into such difficult trade-offs between their participation and meeting skills needs objectives.